Monday, 15 July 2013

GREECE: Austerity, Reforms & Reality

Despite drastic austerity measures, a new Greek debt haircut looks unavoidable. The old system has proven resistant to reform and billions in emergency aid hasn't been enough to turn things around.

Greece's euro partners have already pledged more than €230 billion in aid, and government spending has also been slashed by dozens of billions. Representatives of Greek business are now convinced that the country cannot survive without yet another debt haircut.

The subject is politically sensitive because this time a debt haircut would also affect public creditors, which already hold 80 percent of Greek sovereign debt.

The country needs more than money alone to get back on its feet. Even the IMF is critical of the devastating effects of austerity programs on the country's economy. But that is only half the truth. The fact is that while Greece has drastically cut spending, efforts at structural reform are stagnating. This also hampers economic success.

When the troika observers first arrived in the country in 2010, they were surprised at just how overregulated the economy was, at how inefficient the entire government and judicial apparatus had become. Not even the estimated government deficit for 2009 was correct. When it was recalculated, 6 percent turned into 12.7 percent and eventually even went up to 15.6 percent.

Six austerity programs later, the deficit is expected to decline to about 4 percent for this year. Greece's euro partners attribute this success to the efforts of conservative Prime Minister Antonis Samaras. The country finally has a complete picture of its revenues and expenditures, and Samaras has made progress with reforms of the healthcare system. The labor market has also been radically reformed. Greece's costly multi-employer collective bargaining agreements are now history, and the rules governing settlement payments to laid-off workers are no longer as stringent as they used to be.

This spring, because of these successes, it seemed that the country was out of the woods. Unit labor costs, seen as an indicator of a country's competitiveness, had declined by 10 percent compared to 2007, thanks to the easing of labor market regulations. Major corporations like Unilever, Philip Morris and Hewlett-Packard were announcing substantial investment plans.

During a visit to Beijing, Samaras overconfidently touted what he called his "Greek success story."
But what outsiders see as successful reforms come at the expense of ordinary Greeks. Surveys show that household income has plunged by almost 40 percent since the crisis began. Some 64 percent of young people are unemployed, and the healthcare system, after several rounds of austerity cuts, is on the verge of collapse. In many public hospitals, patients have to pay for their own bandages and swabs, while relatives are called upon to care for them, because of a shortage of nurses.
In light of such conditions, the troika has often proposed that the wealthy be required to play a stronger role in financing the government. But even the Samaras administration shies away from challenging their influential lobbying groups. Greek ship owners, for instance, the country's most powerful business group, contribute little to the country's recovery. In fact, their ample revenues from shipping are tax-exempt.

Greece political system is toxic. The government apparatus and economic structure were destroyed by decades in which bribes and political relationships were more important than performance. Over the years, powerful lobbying groups were able to secure privileges that they are now fiercely defending.

By 2015, the government bureaucracy is required to shrink by 150,000 jobs, and another 15,000 civil servants are to be replaced by young, well-qualified candidates. But the government has long shied away from layoffs. Instead, the government promoted early retirement programs and placed 2,000 civil servants into a so-called mobility reserve. Athens had promised the troika that the workers would be permanently laid off if no new jobs could be found for them within a year. But the government managed to find work for everyone in the mobility reserve, and a promised search for another 12,500 civil servants for the program petered out.

The sometimes ludicrous conditions in Greece's government agencies are one of the main reasons the economy is doing so poorly. In one example, a fast-track process introduced in 2010 was intended to help entrepreneurs obtain all the permits they needed within 60 days, which was later changed to 45 days. But three of four major investors that completed this procedure are still fighting for their projects today.

There is no shortage of ideas about how to move the country forward. For example, there is significant room for expansion in the shipping-related service sector, especially in areas like "logistics, insurance and storage and tourism industry. But these are the kinds of plans that require a long time to implement.

These conditions make the troika's forecasts for future development seem delusional. It expects the country to generate 3.5 percent growth in 2017, while the national debt is forecast to decline from 175 percent of GDP today to "substantially below" 110 percent by 2022.